Scribd
Upload
26 views2 pages

07 - Transfer Pricing

The document discusses transfer pricing, which is the price used when divisions within a company transfer goods between each other. The primary objective of transfer pricing is to maximize profit for the company. Transfer prices are usually determined by market price, cost-based price, negotiated price, or arbitrary price set by corporate headquarters. Sample problems demonstrate how to determine the maximum and minimum prices that divisions should charge each other to benefit the overall company.

Uploaded by

dumpyforhim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
26 views2 pages

07 - Transfer Pricing

The document discusses transfer pricing, which is the price used when divisions within a company transfer goods between each other. The primary objective of transfer pricing is to maximize profit for the company. Transfer prices are usually determined by market price, cost-based price, negotiated price, or arbitrary price set by corporate headquarters. Sample problems demonstrate how to determine the maximum and minimum prices that divisions should charge each other to benefit the overall company.

Uploaded by

dumpyforhim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Transfer Pricing G.

Ong
Transfer price
– price used to record the transfer of goods between two divisions of a company.
– price charged by one segment to another within the same organization.

The primary objective of transfer pricing is the same as that of pricing a product to an outside party. The
objective is to maximize the return to the company.

Importance to have a well -set transfer price


 It affects the performance evaluation of the segments. (Though it has no impact on the overall profit of the
organization, since it is a revenue of one segment and cost of another, the effects of which will be ultimately eliminated
or offset.)
 It affects the segment manager’s behavior.

Transfer prices are usually determined by one of the following methods:


A. MARKET price – regarded as the best transfer price that maximizes the over-all company profit, provided
that: (1) a competitive market price exists, and (2) divisions are independent of each other.

B. COST-BASED price – easy to understand and convenient to use but inefficiencies of the selling division
may be passed on to the buying division – selling division will have little incentive to control costs. Cost-
based price can be based on selling division’s variable cost, full (absorption) cost or cost-plus.

C. NEGOTIATED price – widely used when market prices are subject to rapid fluctuation or when there is
no intermediate market price that exists. In negotiating a transfer price, the usual range shall be based on
the following:
 Maximum price (buying division): Cost when the buyer purchases from an outsider.
 Minimum price (selling division): Incremental cost (total variable cost of providing good to the buying
segment) + opportunity cost (any foregone contribution margin from outside sale for accepting the buyer’s order)

Sample Problem: Bacolod Corp. has several segments that run as independent profit centers. At the present
time, the Forging Segment produces T-1000, a popular part used in robotics. Data about the part is given.
Market price ₱ 84
Variable distribution costs for outside sales 9
Variable manufacturing cost 36
Fixed manufacturing cost 18
Bacolod's Fitting Segment wants to purchase 4,500 parts either from Forging, or a comparable part in the
marketplace that sells for ₱72. The Fitting Segment's management feels that if Forging Segment's part is used,
a price discount is justified, since they both belong to the same corporation.

Case 1: If Forging Segment has excess capacity to manufacture the 4,500 parts needed by Fitting.
Maximum price is ₱72.
Minimum price is equal to variable manufacturing cost ₱36. The distribution cost is for outside sales,
therefore, sales to Fitting will not incur any distribution cost.
The transfer price should be between ₱36 and ₱72.

Case 2: If Forging Segment has no excess capacity to manufacture the 4,500 parts needed by Fitting.
Maximum price is ₱72.
Minimum price = Variable manufacturing cost
+ Opportunity cost = sales – variable manufacturing cost – variable distribution cost
= ₱36 + (₱84 – 36 – 9)
= ₱75
Conclusion: Therefore that the two segments should not transact with each other for the over-all benefit
of the corporation.
Transfer Pricing G. Ong
Case 3: If Forging Segment has excess capacity to produce 1,500 units needed by Fitting.
Maximum price is ₱72.

Minimum price = Variable manufacturing cost + Opportunity cost = sales – variable manufacturing
cost – variable distribution cost
= ₱36 + [(₱84 – 36 – 9) x 3,000/4,500]
= ₱36 + 26
= ₱62

Conclusion: Therefore that the two segments should transact with each other for the over-all benefit of
the corporation.

Case 4: ABC Corporation has two segments, A and B, both of which are profit centers. A charges B ₱105 per
unit for each unit transferred to B. Other data pertaining to segment A follow:
Variable cost per unit ₱ 90 Annual sales to B 5,000 units
Fixed costs ₱ 30,000 Sales to outsiders 50,000 units
A intends to raise its transfer price to ₱150 per unit. B can buy units at ₱120 each from an outsider but
doing so would keep A's facilities now committed to producing units for B idle. A cannot increase its sales
to outsiders. B's performance will not be affected in any case. From the point of view of the company as a
whole, from whom should B purchase the units?

Conclusion: At ₱90 per unit Segment B can transact with Segment A, but if Segment A increases its
transfer price ₱150 per unit, then Segment B will be better-off purchasing from outsider.

D. ARBITRARY price – normally imposed by the corporate headquarters to promote over-all company
goals with neither the selling division nor the buying division having a control over the price.

You might also like